Is There a Debt Default Plan? Plus, the San Francisco Fed Whitewash
Author: Greg Valliere
May 1, 2023
SO WHAT WOULD HAPPEN IF THERE’S AN IMMINENT DEFAULT? Biden Administration officials have been tight-lipped, because if they detail default plans it could incite proponents of not raising the debt ceiling, who would claim that there are options for dealing with it.
IF THE SO-CALLED “X” DATE, an actual default, appeared imminent, there would be the very real threat that Treasury would start missing federal payments, such as interest on debt, Social Security benefits or military salaries. That would produce a political firestorm, a game of chicken that Joe Biden and Kevin McCarthy appear willing to risk.
AS THE WALL STREET JOURNAL reports this morning, planning has begun for a possible default. Officials are mindful of the near-default in 2011, when Treasury decided to give priority to paying principal and interest on Treasury securities out of available tax revenues, “because failure to do so risked mayhem in markets that might permanently impair the economy and the U.S.’s financial standing,” the Journal reports.
UNDER PRIORITAZION, once debt has been serviced, the timing of other payments, including Social Security, payments to defense contractors and reimbursements to doctors for Medicare, would become uncertain “and depend on the ebbs and flows of revenue until the debt ceiling is ultimately lifted.”
THERE WILL BE AN INTENSE FOCUS on the Fed’s payment system, called Fedwire, which wasn’t programmed in 2011 for late payments on Treasury bonds. If a bond matures without being repaid, it would effectively disappear from the Fedwire system as if it had been paid on time. Billions of dollars in assets held by financial institutions around the world would effectively go “poof,” the Journal says.
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THE BLAME GAME ON BANK FAILURES reached an absurd level late last week, when the Fed and the FDIC essentially blamed themselves for lax enforcement of regulations on the books — but nevertheless the reports called for more regulations.
NOWHERE IN THESE REPORTS was there any blame of officials, who seemed asleep as the Silicon Valley Bank amassed a portfolio that was destined to fail as interest rates rose. Nowhere was there any concession that the San Francisco Fed was filled with officials who seemed eager to please (or work for) the Silicon Valley Bank.
THERE MAY BE MORE REGULATIONS, but what about the responsibility of officials to enforce regulations already in place? What about bank officials at SVB who compensated themselves lavishly? And, to be blunt, why was there no mention of the seemingly incestuous relationship between the San Francisco Fed, the regulators, and the banks?
SAN FRANCISCO FED PRESIDENT MARY DALY seems to enjoy a charmed life; she’s a media darling. But she deserves some of the blame for a lax climate. If this banking crisis results in more regulations, that would be a cop-out; there has to be a focus on individuals who didn’t enforce regulations that already are in place.
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